We need a strong and sustained carbon price to combat climate change

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In Business Green last week Tom Burke argued that a narrow cost-benefit analysis and an obsession with carbon pricing is steering politicians away from the action climate change demands, but he appears to misunderstand what he is criticising.

It is unfortunate that he should state “We have a very precise idea of what constitutes climate policy success – staying below 2ºC” on the very day that 18 leading climate and policy experts claim that “the limit of 2C of global warming agreed by the world’s governments is a “dangerous target”, “foolhardy” and will not avoid the most disastrous consequences of climate change”.

So maybe not quite so precise after all. Most analysts would recognise that it is impossible to convert a temperature rise target into an exact limit on emissions. Our uncertain knowledge of the climate system prevents it.  The best we can possibly do is make statements like ‘if we keep our emissions of CO2 below 500 GtC from now on, there is a 40% chance that the temperature rise will not exceed 2 degC’.

Rather than doing this, Burke chooses to attack the only method we have of bringing some evidence to bear on this question, ‘the integrated assessment models (IAMs) developed by… economists such as William Nordhaus of Yale’, and also by Richard Tol at the University of Sussex, and me at the University of Cambridge. He offers no substantive criticism of the models, mentioning only their damage functions, but instead falls back on an appeal to authority: Pindyck from MIT says they are useless, so they must be.

Unfortunately, Pindyck also seems misinformed about some important aspects of IAMs. To give just one example, Pindyck writes, ‘IAMs cannot tell us anything about catastrophic outcomes…Perhaps the best we can do is come up with rough, subjective estimates of the probability of a climate change sufficiently large to have a catastrophic impact, and then some distribution for the size of that impact (in terms, say, of a reduction in GDP or the effective capital stock)’ (pages 14-15).

In fact, this is exactly how the PAGE IAM incorporates catastrophic outcomes, and has done since 2002. (See, for instance table 6 here)

So why would Burke choose to attack IAMs? It seems he is worried that the models will inevitably recommend a carbon price that is only ‘a marginal change’ in the price of energy. But this is not so. The mean carbon price recommended by the PAGE model is over $100 per tonne of CO2 in the EU, and over $200 per tonne in the US. (See chapter 17 here)

A carbon price of even $100 per tonne of CO2 is anything but ‘a marginal change’. It increases the cost of generating electricity from coal by over a third, for instance, levelling the playing field for renewables and other low carbon sources of energy. Anyone who studies the options for de-carbonising the economy recognises that a carbon price of $100 per tonne of CO2 is a large part of the answer.  It also generates close to £50bn per year in tax revenues in the UK alone, which could be used to reduce income tax and VAT down to 15%, stimulating the economy, and still leave £10 bn per year to improve the welfare of the poorest in society who struggle to heat their homes in winter. Provided, that is, the revenues are not largely ‘recycled into paying to lower the cost of capital for low-carbon technologies’.

Are the estimates from IAMs perfect? No. But the modellers recognise this and deal with it honestly by putting wide uncertainty ranges around their inputs. A strong and sustained carbon price at the levels recommended by the PAGE model should be the foundation of our attempts to combat climate change.

This is a slightly edited version of the response published by Business Green on 5 December 2013.

Amended 12:30 9 December 2013 to replace ’18 leading climate scientists’ with ’18 leading climate and policy experts’.

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